The decision rendered by the Quebec Superior Court on June 13, 2016 in Samoisette v. IBM Canada Ltd., 2016 QCCS 2675 has not dramatically altered the state of the law applicable to pension plans. However, Justice Duprat reminds us in his decision that brochures and other information provided to employees can have the effect of modifying their employment contract. In order to reduce litigation risks, employers should be very careful what they say when communicating with members of the company pension plan, particularly when members are called upon to make important choices, such as when there is a change or conversion from a DB to a DC plan.
Overview of the facts
- IBM operates a facility in Bromont, Quebec employing hundreds of workers, all of whom are non-unionized. The conditions of their employment relevant to this case are (a) a defined-benefit pension plan that includes a bridge benefit, and (b) a health-care plan that continues to apply post-retirement.
- Jean Samoisette, the representative of the members of the class action group, became a member of the pension plan when he was hired in 1978 at the age of 19.
- Over time, the pension plan was amended in various ways. The bridge benefit was added to the plan in 1991.
- In 1994 IBM instituted a new pension plan featuring defined contributions rather than defined benefits. As an incentive for employees to opt for the new plan, IBM offered to make a contribution equal to 40% of a member's accumulated contributions to the original plan. The evidence at the hearing showed that this additional contribution was intended to compensate for certain differences between the DB plan and the new DC plan, including the bridge benefit which was available only under the former. The employees had to choose between the two plans in 1994, and their choice was final and irrevocable.
- Samoisette and other members of the group testified that they decided in 1994 to stay in the DB plan in order to remain eligible for early retirement (before age 65) and to continue to be entitled to the bridge benefit. This testimony was to prove determinative in the Court's decision.
- As of 2001 the health insurance plan had a benefit known as the "health care spending account".
- In 2006 IBM unilaterally amended the DB plan to eliminate the bridge benefit, except for employees eligible to retire on or before December 31, 2007.
- In 2006 IBM also modified the health insurance plan to eliminate it going forward, except for members who were employees prior to January 1, 2005. They were still entitled to the benefit of the health care spending account, but only until age 65, rather than for the rest of their life.
What was Samoisette seeking?
Essentially, Samoisette and the plan participants were asking the Court to recognize that both the bridge benefit and the health care spending account were integral components of their remuneration and binding contractual obligations of IBM, and that IBM could not unilaterally amend the DB plan to eliminate the bridge benefit, or limit entitlement to health care benefits after retirement.
What did the Court decide?
(a) Basic principles pertaining to pension plans
Before examining the evidence, Justice Duprat considered the legal characterization of the pension plan. He did so essentially in light of well-established Quebec case law according to which:
- A pension plan is an integral part of an employee's remuneration and thus one of the key components of his or her employment contract.
- A pension plan is a contract between the employer and the plan participants that is governed by both the Civil Code of Québec (the "CCQ") and the Supplementary Pension Plans Act (the "SPPA").
- A Court must always seek to construe the plan text in light of both the CCQ and the SPPA, such that the SPPA cannot be interpreted as if it was the sole governing statute. In the event of an irresolvable conflict between the two pieces of legislation however, the specific rules of the SPPA take precedence.
- Under the CCQ a pension plan is an adhesion contract, and must therefore be interpreted in favour of the plan members.
- The employer has the right to modify employment conditions, including the pension plan. A provision in the pension plan allowing the employer to modify it unilaterally is not inherently unreasonable or abusive, and is presumed to be valid. This presumption can however be rebutted by the evidence.
- The vested rights of an active plan member cannot be revoked retroactively, and a unilateral amendment of the plan by the employer cannot negatively affect them.
- The representations and information in the guides, brochures and other documents provided to employees can create rights for those employees, to the extent that they constitute a promise that employees are induced to or do rely on. The effect of such representations is to be determined in light of the evidence.
(b) IBM did not have the right to eliminate the bridge benefit
Justice Duprat rejected IBM's arguments to the effect that the bridge benefit could not be considered an essential condition of the employment contract as it did not exist when Samoisette was hired, and even if it was an essential condition, the employer could modify it after giving prior notice. Nor was the judge convinced by IBM's contention that the rights to the bridge benefits had not yet become acquired, since the members of the group were not eligible for retirement when the plan was amended in 2006, such that IBM could modify the plan without affecting these employees in any way.
Justice Duprat saw things altogether differently. His analysis can be summarized as follows:
- Even if the bridge benefit was arguably not an essential condition at the outset, and a unilateral amendment by the employer should be presumed to be valid, the evidence defeated those arguments.
- The evidence showed that both the software prepared by IBM to help employees choose between the existing and the new plan in 1994, and the documents provided to them at that time as well as on the occasion of subsequent annual updates, contained no limitation or caveat to the effect that the bridge benefit could be modified or abolished.
- On the contrary, the explanations provided by IBM in 1994 included assurances that participants would receive the bridge benefit. The employees were given no reason to believe that the bridge benefit might eventually be abolished.
- The evidence also showed that in 1994 the employees relied on the representations and information provided by IBM in electing to remain in the DB plan and in planning to take early retirement based on the amount of their pension combined with the bridge benefit.
- The fact that the decision made by each participant in 1994 was irrevocable appears to have influenced the judge's perception of the importance of the information provided by IBM and of the participants' reliance on that information.
- Consequently, as of 1994 the bridge benefit effectively became an essential condition of the employment contract that could not be modified unilaterally, even though Samoisette did not become eligible for early retirement until December 31, 2008, i.e. after the unilateral modification in 2006.
- A provision giving IBM the right to unilaterally modify an essential condition of the employment contract, in respect of which IBM had made representations and warranties to its employees, is an abusive clause.
- The Court dismissed IBM's argument to the effect that when an essential condition of the employment contract is breached by the employer, the employee can resign and bring an action for constructive dismissal. The Court concluded that while the revocation of the bridge benefit was a serious breach of an essential condition of the employment contract, it could not be characterized as constructive dismissal.
- The Court came to this conclusion in part by noting that the employer had no intention of putting an end to the employment contract and the employees did not view revocation of the bridge benefit as constructive dismissal either.
(c) IBM had the right to amend the health-care plan
The same principles as those canvassed above regarding the pension plan apply to the health-care plan. Thus, the benefits thereunder are part of the employees' remuneration. The employer can modify those benefits at any time, which IBM did on several occasions, but it cannot do so abusively by revoking guarantees or acquired rights.
In the Court's view, the evidence regarding the health-care plan differed markedly from that concerning the pension plan, in that:
- The documents provided over time to the employees clearly indicated that the health-care benefits could be modified; the caveats to that effect were clear.
- Witnesses confirmed that IBM never made any representation to the effect that the addition of the health care spending account in 2001 was immutable.
- Consequently, the health care spending account was not a guaranteed promise.
- Moreover, since Samoisette had not yet reached retirement age, his right to certain health-care benefits had not become an acquired right.
- The Court accordingly concluded that IBM could unilaterally amend the health-care plan so as to limit entitlement to the health care spending account.
(d) IBM must pay compensatory damages to the members of the group
The revocation of the bridge benefit deprived the members of a benefit that was certain and monetarily quantifiable.
Based on the calculations of actuarial experts, but without deducting the value of base year improvements, the judge ordered collective recovery of the bridge benefit under the pension plan, in a total amount of approximately $23,500,000.
IBM was accordingly ordered to pay each of the members of the group the amount of the member's individual claim in respect of the bridge benefit, adjusted as at October 1, 2015, plus interest. The parties are to appear again before Justice Duprat (unless an appeal is filed before July 13) to determine the terms of distribution of the damages award, which will no doubt prove to be contentious as well.
What can employers take away from this decision?
Even if the judgment is appealed, the following important lessons can be drawn from it:
- In several respects this decision merely confirms the state of Quebec law as related above, such that the law is increasingly constant regarding the basic legal principles in pension plan matters.
- In litigation involving pension plans, it is frequently the case that documentation, facts and events from several decades ago (more than 20 years in this instance) must be entered in evidence before the Court. Employers must be able to justify decisions made long ago, so keeping adequate records is essential.
- In order to reduce litigation risks, care must be taken with the content of periodic information provided to members. Given the complexity of pension plans, it may be difficult to communicate that information in such a way that the participants fully understand it, but all necessary efforts must be made to achieve that end without overly simplifying, or making firm commitments if you do not intend to be bound by them indefinitely. This is particularly true regarding important issues such as a choice between a new plan and the existing one.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.